The merger between Suzano and Fibria dominates, but Schalka looks beyond.
Walter Schalka, CEO of giant pulp and paper producer Suzano, has been named RISI’s Latin American CEO of the Year for the fourth consecutive time. Schalka was cited by several market analysts as a key player in the merger process between Suzano and Fibria, one of the largest deals to take place in the sector this decade.
After the transaction is complete, the new company will be a global leader with 11 million metric tpy of hardwood pulp capacity. Schalka has been Suzano’s CEO since 2013. Previously, he was CEO of Dixie Toga Group in Brazil and Votorantim Cimentos. Schalka holds a bachelor’s degree in engineering from the Technological Institute of Aeronautics (ITA) and a graduate degree in Business Administration from the Getulio Vargas Foundation of São Paulo (FGV-SP). He also participated in the executive programs at IMD (Switzerland) and Harvard University.
Risi: Can you detail the changes that took place inside Fibria and Suzano so the merger deal could become a fact after several years of rumors? As a CEO, what do you believe is your main role in such a challenging environment, bringing together different interests, ways of doing business and, most important, people?
Schalka: The two groups had a long relationship history. In the past, they were even partners in the Conpacel mill (now Suzano’s Limeira mill), so they knew each other very well. The approach for the merger was made professionally, with João Maria Schmidt representing Votorantim group, Nildemar Secches and me Suzano, and Eliane Lustosa speaking for BNDES (Brazilian National Development Bank, a shareholder in both companies).
The deal didn’t take place before because the companies were at different moments of leverage or capacity expansions, making it very hard to reach a moment where the deal could be suitable for both. At this time, however, everything converged, and the conversations aligned, as all three (Suzano, Fibria, and BNDES) were seeking an opportunity for their businesses.
We are passing through this period of preparation for the conclusion of the deal with tranquility and maturity, while preparing all the conditions that will allow the merger to actually take place, including the approval by anti-trust authorities and SEC’s (US Securities and Exchange Commission) final OK. Meanwhile, we are working on lengthening the debt for the bridge loan necessary for the operation, as well as studying all synergies for the after-closing. We have a consultancy already working on it with the preparation of our culture, values, and several other actions being taken so when the moment for the closure comes all is ready.
This process is very challenging intellectually. You must understand the effect of the merger in all spheres of the market, including clients, competitors, and suppliers, so we are having a lot of interaction with them. The union of the two companies is very positive for the sector; it will generate more competitiveness and will allow us to improve service to customers, with better logistics alternatives and access to more terminals.
Both companies also have strong R&D departments that will have an interesting combination of studies. The result is that we are putting together two very good groups, creating a new company that will make Brazilians very proud.
Apart from the deal with Fibria, Suzano has been showing that innovation and new technologies are a very important part of its business. The company is producing Eucafluff and soon will offer lignin in large-scale. How do you create a working environment where such disruptive products can become a reality without losing focus on your main products?
Suzano has innovation in its tradition and DNA. It was one of the first groups in the world to work with eucalyptus fiber, breaking into a market that only used softwood pulp. Today, hardwood pulp has a bigger market compared with softwood. Suzano has inherited the spirit of innovation from the family that funded the company, and this demands several corporate behaviors, including acceptance of mistakes and that sometimes we need adjustments. We can’t expect that, when trying new things, we will get everything right at once.
Fibria also has innovation projects and we intend to continue searching together for new alternative products from the forests, as we have the privilege to work with this raw material. There are several examples of things that can be made: lignin and fluff are but two. Nanocellulose is another interesting path, while dissolving pulp has properties to serve the clothing industry. We don’t know if all alternatives that we study will work out, but if it doesn’t happen we will not be sorry, as a fundamental principle for us is that any innovation should be replicable and can be scaled up. We will not work on anything that will remain very small.
When we see an opportunity, we put more effort and strength into making the idea grow and become relevant. This is why we have a separate area, Innovation and Business Development—which I say is our neonatology—with personnel focused on it who are aware that the timing for these products is different. It is completely different than looking after a machine that is already running and will demand continuous competitiveness.
Suzano has invested in tissue capacity, but we haven’t seen any new expansion projects for its traditional printing/writing and boxboard areas recently. Can you detail the company’s perspective for these grades and how it deals with demand challenges for coated woodfree?
The paper business has geographic components. At the moment, we are able to meet the demand of the Brazilian printing and writing market, while looking into the international panorama. Boxboard is different, and we might analyze an investment in the future.
These facts don’t mean that we are done with the paper market, as we have many possibilities. For example, we have recently launched our cupstock paper, which uses coated woodfree paper and opens a new frontier for the use of hardwood fiber. The only limitation that we have in developing new products is the human factor. The board is very supportive of our executives and gives them room to invest and create value-added businesses. Results have been very positive, but we must admit that there is a lot still to be accomplished.
In the beginning of the year, Suzano disclosed plans for a new large pulp mill in São Paulo state. The plan was put on hold due to the M&A with Fibria; but in July, Suzano concluded purchase of land from Duratex in the region. What does this move represent? Is Suzano paving the way to resume investments as soon as it closes the deal?
Our main focus at the moment is the conclusion of the deal with Fibria. Following that, we will seek the deleveraging of the company. If pulp prices and currency exchange remain at current levels, this will take place fast. Of course, organic growth is an option, but it doesn’t mean it will be done, as we will need to analyze the best decision for our strategy when the time comes.
We still have aspects that need to evolve, but we have a very strong transformation energy inside the company, and in every department improvements are taking place, including areas that are not visible, such as community relations and the environment. Meanwhile, we are boosting the level of services to our clients, enhancing the quality of our products, and developing new technologies. On the financial side, we are not only preparing the funding for the merger operation, but also preparing the company for the future.
We are giving room to people to exercise autonomy and this generates a virtuous cycle. This is not a prize for me personally, but all workers that make things happen, as in my opinion there isn’t a single person who, like a magician, can transform an entire company. I am only the conductor, but without good musicians it would never work.
The new company will be born as one of the top four enterprises in Brazil, and the largest in the agribusiness sector, but will keep a young, innovative spirit. Our goal is to form a company that positively affects society and people’s lives since in the future we will serve two billion customers with our products worldwide.
Marina Faleiros is a RISI news editor based in São Paulo, Brazil.